Impact of Excise Tax on Non-alcoholic Carbonated Soft Drink in Vietnam 2014

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Soft Drink Industry and the Economic Impact of Excise Tax on Non-alcoholic Carbonated Soft Drink in Vietnam by Dr. Ngyuen Dinh Chuc

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Impact of Excise Tax on Non-alcoholic Carbonated Soft Drink in Vietnam 2014

  1. 1. SOFT DRINK INDUSTRY AND THE ECONOMIC IMPACT OF EXCISE TAX ON NON-ALCOHOLIC CARBONATED SOFT DRINK IN VIETNAM Dr. Nguyen Dinh Chuc
  2. 2. Introduction v  The Law on Excise Tax: ◦  Ratified in 2008; 16 groups of commodities ◦  Role: the economic development, state budget, production and consumption pattern, the commitments of the country with WTO,… v  7th February 2014: a draft of the modified excise tax law => carbonated non-alcoholic drink subject to excise tax v  The economic impact of the excise tax imposition on the soft drink industry inVietnam?
  3. 3. Sort drink industry inVietnam 1. Overview v  A potential market for soft drinks: population (2011: 87.6 million, increase 1%/year), GDP per capital (1,300USD/year),… v  A highly competed with the present of multiple players: 134 enterprises (FDI and domestic enterprises) v  The rapid development of domestic enterprises v  Average growth rate: 16.73% (2008-2013) v  Food and drink sector:VNR500 2013 => ranked 4th in revenue, 2nd in average ROA, 3rd in average ROE); contribute 15% to GDP
  4. 4. 2.The structure of the Vietnam soft drink industry Figure  1:  Structure  of  Vietnam  so4  drink  industry    
  5. 5. 2.The structure of the Vietnam soft drink industry v Non-­‐Alcoholic  Drink   The  volume  structure:  be  more  diversified   —  Share  of  tea  and  coffee:â.  Tea:  50.15%  (2002)  down  to   39.97%  (2012).  Coffee:  15.3%  (2002)  down  to  8.87%   (2012).     —  The  share  of  Ready-­‐To-­‐  Drink  (RTD):  á.  RTD  Tea:  30.84%   (2002)  to  52.26%  (2012).  RTD  Coffee:  32.09%  (2002)  to   45.95%  (2012).   —  Dairy/soy  beverages:  17.12%  (2002)  up  to  21%  (2012)  =>   the  efficiency  of  the  NaSonal  Strategy  on  NutriSon   The  value  structure:  tea,  coffee,  dairy/soy  beverages  =>  main   products  (2012:  72.95%  of  non-­‐alcoholic  drinks)   The  price  change:  increase  6.2%/year.  Core  sparkling  drinks   (á 8%/year),  Juice  drinks  (á 6.4%/year)  
  6. 6. 2.The structure of the Vietnam soft drink industry v Alcoholic  Drinks   The  volume  structure:     —  Dominated  by  beer:  (93.73%  in  2012,  á  10.37%/year   in  2002-­‐2012)   —  The  others  Alcoholic  Drinks:  á  slowly  (5.8%/year  in   2002-­‐2012).  2012:  40.5  million  units,  go  up  2.8%)   The  value  structure:  beer  take  most  of  the  market   (93.73%  in  2012,  increase  17.22%/year  in  2008-­‐2012).   2012:  US$  5,870.6mn,  go  up  18.14%.  The  others   Alcoholic  Drinks:  á  9.7%/year  in  2008-­‐2012.  
  7. 7. Methodology and approaches 1.  Price  elasCcity  approaches:  Ed  =(ΔQ/Q)  /  (ΔP/P)   Ed: price elasticity of demand,  ΔQ/Q:  percentage change of demand and ΔP/P:  percentage change of price ⇒  Ed=0:  Perfectly inelastic demand; -1<Ed<0:  Inelastic or relatively inelastic demand; Ed=-­‐1:  Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand; -0 < Ed<-­‐1:  Elastic or relatively elastic demand; Ed=-­‐∞ : Perfectly elastic demand ⇒  Affect  revenue  or  output  of  a  commodity   2.  Excise  tax  and  its  impact:  depend  on  the  price   elasScity  of  demand  for  those  goods  and  services.  The   cost  of  consumers  and  producers  for  the  applicaSon  of   excise  tax  
  8. 8. Methodology and approaches 3.  An  empirical  approach  to  elasCcity  measurement   FuncConal  form:       The  slope  parameter  is  a  direct  measure  of  elasScity   =>     Y:  the  quanSty  demanded,  P:  price,  X1  to  X2:  control   variables,  interacSon  between  control  variables,  e:  residual   Database:  monthly  volumes  and  values  of  soc  drinks  sold  in   the  market  of  the  6  largest  ci:es/provinces  (Hanoi,  HCM  city,   Da  Nang,  Can  Tho,  Hai  Phong,  Nha  Trang)  in  Vietnam  in  the   period  from  2007  to  2013  provided  by  professional  market   research  company  –  Canadean.     ( ) eXXXXPY qpmnn ++++++= lnln...lnlnln 1321 αββββ lnY = β1 + β2 ln X
  9. 9. Methodology and approaches 4.  General  equilibrium  approach   v  CGE  (Computable  General  Equilirbium)  approach:   analyze  the  impacts  of  industrial  and  sector-­‐level  policies   v  Constant  returns  to  scale;  Intermediate  demand:    fixed   technology  coefficients;  constant  elasScity  of  subsStuSon   (CES)  producSon  funcSons  allow  factor  subsStuSon  based   on  relaSve  prices  
  10. 10. Methodology and approaches Conceptual Framework for the Economy-wide Model                  
  11. 11. Methodology  and  approaches   v  SubsStuSon  possibiliSes  exist  between  producSon   for  the  domesSc  and  the  foreign  markets.  The  small-­‐ country  assumpSon   v  The  model  disSnguishes  between  30  representaSve   households  that  are  disaggregated  across  the  two  sub-­‐ naSonal  regions  (i.e.,  Mekong  Delta  and  RoV),  by  farm/ nonfarm,  fish/crop-­‐only  farms,  and  by  per  capita   expenditure  quinSles.   v  Three  broad  macroeconomic  accounts:  the   government  balance,  the  current  account,  and  the   savings-­‐investment  account   v  Calibrated  to  the  2011  social  accounSng  matrix   (SAM)  (update  from  2007)    
  12. 12. Impact of excise duty imposition 1.  Empirical results: impact on the industry The relationship of quantity demanded and prices of other drinks. E.g. Sparkling soft drink and its price.The regression results:     Y: the quantity demanded of sparkling s ; dGDP: growth of GDP (increase in income of customers); PED, PFJ, PPW, PSM: price of energy drink, fruit juice, packaged water, soya milk; PPSSDED: the interaction between its own price and price of energy drink ⇒  Carbonated soft drinks: sensitive with the change in price. Price á 1% => Demand â 2.8%. ⇒  ExciseTax Rate á 10% => Demand â 28% YSSD = −2.81* PSSD + 0.0009* dGDP + 3.98* PED − 0.96* PFJ −1.98* PPW − 0.55* PSM +1.81* PPSSDED
  13. 13. 1. Empirical results: impact on the industry Table: Effects of ExciseTax of 10% on Carbonated Soft Drinks in 6 largest cities/provinces No Items Carbonated soft drink 1 Price elasticity of carbonated soft drinks -2.8 2 The quantity average demand in 2013 ('000 units) 3,927 3 Average sale value in 2013 (million vnd) 470,822 4 Total sale value in 2013 (million vnd) 5,649,864 5 Average price of carbonated soft drinks ('000 vnd) 120 6 Proposed excise tax rate on carbonated soft drinks (%) 10 7 Price after excise tax 129 8 Quantity of carbonated drinks after excise imposition ('000 units) 3,102 9 Loss/gain of quantity demanded of carbonated drinks ('000 units) -825 10 Average sale value after excise imposition (million vnd) 399,846 11 Loss/profit in a month (million vnd) -70,976 12 Loss/profit in a year (million vnd) -851,717  
  14. 14. 2. Empirical results: impact on the economy Table:Vietnam in 2011 Items Value GDP by current price (billion VND) 2,535,008 Structure of GDP (%) Agriculture, forestry and fishing 22.02 Industry and construction 40.79 Service 37.19 GDP by expenditure category at current prices (billion VND) 2,535,008 GDP by expenditure category at current prices (%) Gross capital formation 32.63 Gross fixed capital formation 29.41 Changes in stocks 3.22 Final consumption 70.79 State 6.48 Private 64.31 Trade balance (goods & services) -4.22 Statistical discrepancy 0.8
  15. 15. 2. Empirical results: impact on the economy v  Excise tax on carbonated soft drinks 10% => demand â => output and production of the industry â => customers and suppliers â, income of household â v  Excise tax on carbonated soft drinks (imposed on factory prices) 10% => quantity of domestic productions soft drinks â 0.58%, GDP â 0.010% (US$ 12.1 mn)
  16. 16. 2. Empirical results: impact on the economy —  3. Empirical results: impact on the Government budget No   Government  budget  components  (million  VND)   Carbonated   soft  drink   1   Increase  in  government  revenue  due  to  excise  tax   imposition    396,541     2   The  loss  of  value  added  tax  revenue   -­‐85,172   3   The  loss  of  enterprise  income  tax   -­‐77,105   4   Government  revenue  (revenue  substracted  by  losses)    234,264       -  Excise tax imposed on factory price: CGE approach: GDP â US $ 12.1 mn => Government revenue â US$ 2.7 mn (VND 56.5 billion) => Total government revenue will increase US$ 8.46 mn
  17. 17. Comparision with Indonesia case Decrease in soft drink industry revenues Rp. 5.6 trillion US$ 487.2 mn Decrease in government revenue Rp. 783.4 billion US$ 68.2 mn Decline in GDP Rp. 12.2 trillion US$ 1,061.4 mn Decrease in wage and salary income Rp. 1.56 trillion US$ 135.7 mn   A similar but more comprehensive study on Indonesia shows that, imposition of excise tax on carbonated drinks of RP 3,000 (equivalent to increase in price of 37,8%) will result in the following impacts
  18. 18. Conclusion v  Economic impact of excise tax imposed on non-alcoholic soft drink: ◦  Government revenue increase by 8.46 million ◦  Soft drink industry revenue loss of USD 40.5 million (VND 851 billion) ◦  USD 12.1 million (VND 253.5 billion) loss to other sectors ◦  Other negative impacts: employment effect, income effect, influence on other drinks, cost of running a system of excise tax collection ◦  The imposition of excise tax on carbonated soft drink is questionable economically.
  19. 19. Thank you!
  20. 20. Central Institute for Economic Management SOFT DRINK INDUSTRY AND THE ECONOMIC IMPACT OF EXCISE TAX ON NON-ALCOHOLIC CARBONATED SOFT DRINK IN VIETNAM Hanoi, April 2014
  21. 21. 2 Preface Soft drink industry in Vietnam has been expanding rapidly in the past decades. The expansion of the industry benefits from higher living standards of the population as a result of rapid economic development since the implementation of open door policy. It also results from young population who adopts modern life styles and enjoys economic development of the country. On the other hand, the industry has contributed significantly to the job creation, the economy and the state budget. This report is aimed at measuring the impact of the proposed excise tax on the non-alcoholic carbonated soft drink industry in Vietnam. The excise tax imposition on the non-alcoholic carbonated soft drink industry is proposed by the Ministry of Finance in the 7th February 2014. The excise tax law draft is now in discussion at the Government and opened for contribution of stakeholders. This report is conducted to contribute empirical evidences to the discussion to ensure that all possible aspects of the imposition of the excise tax such as efficiency, effectiveness, fairness, and international practice of the taxation regime should be considered. The Central Institute for Economic Management would like to thank PricewaterhouseCoopers for its financial support that makes this study possible. Views expressed in this study, however, do not necessarily reflect those of the PricewaterhouseCoopers and the Institute bears the sole responsibility for the analyses presented in the study.
  22. 22. 3 Abbreviations APB : Asia Pacific Breweries BMI : Business Monitor International CES : Constant Elasticity of Substitution CGE : Computable General Equilibrium CIEM : Central Institutions for Economic Management FDI : Foreign Direct Investment GAMS : General Algebraic Modelling System GDP : Gross Domestic Product GSO : General Statistic Office Habeco : Hanoi Alcohol Beer and Beverage Company MOF : Ministry of Finance NRTD : Not-Ready-To- Drink RoV : Rest of Vietnam RTD : Ready-To-Drink Sabeco : Saigon Beer Alcohol Beverage Corporation SAM : Social Accounting Matrix SMS : Short Message Service USD : US Dollar VHLSS : Vietnam Household Living Standard Survey Vinamilk : Vietnam Milk Joint Stock VND : Vietnam Dong VNR500 : Vietnam Report 500 WTO : World Trade Organization
  23. 23. 4 Table of contents Introduction  .....................................................................................................................................  6   Soft  drink  industry  in  Vietnam  ...................................................................................................  8   An  overview  ..............................................................................................................................................  8   Manufacturing  enterprises  on  the  beverages  industry  ..............................................................  9   The  structure  of  the  Vietnam  beverages  industry  .....................................................................  11   Non-­‐alcoholic  soft  drinks  .................................................................................................................................  11   Alcoholic  drinks  ....................................................................................................................................................  15   Methodology  and  approaches  .................................................................................................  18   Price  elasticity  approach  ....................................................................................................................  18   Excise  Tax  and  its  impact  ....................................................................................................................  20   An  empirical  approach  to  elasticity  measurement  ....................................................................  20   General  equilibrium  approach  .........................................................................................................  21   Impact  of  excise  tax  imposition  ..............................................................................................  24   Empirical  results:  impact  on  the  industry  ....................................................................................  24   Empirical  results:  impact  on  the  economy  ...................................................................................  26   Empirical  results:  impact  on  the  Government  budget  ..............................................................  28   Conclusion  ......................................................................................................................................  30   References  ......................................................................................................................................  31   ANNEX  I.  The  empirical  elasticity  model  .............................................................................  32   ANNEX  II.  Extract  of  the  Law  on  Excise  Tax  .........................................................................  33   ANNEX  III.Key  Equations  of  Standard  CGE  model  applied  .............................................  35   ANNEX  IV.CGE  Model  Data  for  Vietnam  ................................................................................  40   ANNEX  V.  Macroeconomic  SAM  for  the  Model  ....................................................................  42   ANNEX  VI.  Impacts  of  excise  tax  on  GDP  ..............................................................................  43   ANNEX  VII.  Impacts  of  excise  tax  on  industries  .................................................................  44  
  24. 24. 5 List of Figures Figure 1.Structure of Vietnam soft drink industry .................................................................. 11   Figure 2. Conceptual Framework for the Economywide Model............................................. 22   List of Tables Table 1. Manufacturing enterprises on the soft industry in the period 2000-2011 ................... 9   Table 2. Key players in Vietnam's beverages sector ............................................................... 10   Table 3. The volume structure of non-alcoholic soft drinks (both RTD and NRTD), 2002- 2012 (%)......................................................................................................................... 12   Table 4. The value structure of non-alcoholic soft drink, 2008-2012 (%).............................. 13   Table 5. Average price and change in prices of non-alcoholic drinks, 2008-2012 (USD/unit, %) ................................................................................................................................... 14   Table 6. Share of enterprises in carbonated soft drinks category............................................ 15   Table 7. Alcoholic drink market value structure, 2008-2012 (%)........................................... 16   Table 8. The volume structure of other alcoholic drinks in 2000-2011 .................................. 17   Table 9. Elasticity.................................................................................................................... 19   Table 10. Net effects on revenue............................................................................................. 19   Table 11. Effects of Excise Tax of 10% on Carbonated Soft Drinks in 6 largest cities/provinces............................................................................................................... 25   Table 12. Vietnam in 2011 ...................................................................................................... 27   Table 13. Impact on government revenue from elasticity approach ....................................... 28  
  25. 25. 6 Introduction   Excise tax is a special duty that is applied to several commodities and services which carry negative externalities to change the consumption behaviour, reduce such negative externalities and raise state revenue. In Vietnam, the Law on Excise Tax was ratified by the National Assembly firstly in 1990, then in 1998 and 2008 with several modifications in 1993, 1995, 2003 and 2005. This law, as described by the Ministry of Finance (MOF), contributed to the development of the country, orienting production and consumption pattern of the society, mobilizing reasonably consumer’s income for the state budget. Moreover, excise tax is seen as a tool of the government given the commitments of the country with WTO. There are 16 groups of commodities included in the current excise tax base.1 The MOF in 7th February 2014 submitted a modified draft of the current excise tax law, in which the following commodities are being included: (i) pride- awarded short-message-services (SMS), (ii) non-alcoholic carbonated soft drink. The modified draft of the excise tax law also proposed to increase tax rates with other commodities and services and to change the article on types of gasoline. While explanation for applying pride-awarded SMS is that it is seen as a type of gambling which is not included in previous law, the imposition of excise tax on carbonated non-alcoholic drink is seen as a measure to control its negative externalities (i.e., obesity, cholesterol, diabetes, gout and increased risk of cancer). Even though these negative externalities are in discussion, they are not the main focus of this paper. This study aims at looking for the economic impact of the excise tax imposition on the non-alcoholic carbonated soft drink industry in Vietnam. The study follows a partial impact approach to analyze the influence of excise tax imposition on carbonated soft drink industry. By applying price elasticity analysis, we look for the impact of excise tax imposition on the government revenue and industry output as well as general impact on GDP. This analysis is followed by an impact analysis on the economy as a whole. To this end, the study utilizes the CGE (Computable General Equilibrium) model which allows us to simulate the impact of change in government sector (increasing revenue by applying excise tax on non-alcoholic carbonated soft drink) to the production sector of the economy. 1 Please see the Annex III for tax base and tax rate of excise tax
  26. 26. 7 Due to data unavailability, comprehensive review of economic impacts on other parameters of the economy such as impact on industry’s income tax contribution as well as employment and impact on income tax of people employed by the industry directly and indirectly are not computable. However, as industry output is likely to decline due to tax imposition, it is anticipated that such tax imposition will also yield negative impact on such parameters as well. With this research strategy in mind, the report is structured as follows. The next section will describe briefly about the soft drink industry in Vietnam. Section three is devoted for the discussion on methodology and approaches used in this study. In this section, discussion of price elasticity approach and general equilibrium approach will be presented. Data used in this study is also described in this section. The next section discusses results of the empirical analysis and impact of excise tax imposition on the industry, government budget and the economy. The conclusion section will summarize main findings of the study.
  27. 27. 8 Soft  drink  industry  in  Vietnam   An  overview     The beverage industry in Vietnam has existed for a long time and has been expanding more quickly over the past decades. The development of the industry was supported by foreign investment and the catch-up development of the domestic producers recently. In 1994, Coca-Cola constructed their first plant and has achieved high growth since then. In 1991 Pepsi Co also entered in Vietnam’s market under a joint venture and continues to have strong presence in Vietnam nowadays. In a similar but later move, a giant of the world beverage sector, Nestle, plans to increase its coffee sourcing from local farmers in Vietnam and has committed to a new coffee plant in the country. The US$ 270 million plant will be constructed in the south-east province of Dong Nai and will produce Nescafe-branded products for the domestic and international markets from 2013.2 Products of the beverage sector are diversified with high quality meet consumers' demand.3 The industry has contributed significantly to the economy. At this stage, the food and beverage industry contributes about 15% of GDP and its share is increasing. The reason for such achievement in the beverage sector along with the expansion in production capacity is the young population with improving living standards within the country. In 2011, Vietnam’s population reached 87.6 million, with an average growth rate of about 1%. 81.9% of the population is under the age of 50 years old. In the past decades the country has achieved rapid growth and is now classified as a low-middle income country with GDP per capital of 1,300 USD (approximately 27 million VND) in 2012. In beverage industry, soft drink sector account for substantial proportion of the beverage industry and is one of the most efficient sectors of Vietnam. Among the 500 largest enterprises as reported by VNR500 of 2013, food and drink sector is one of the top five (ranked 4th in revenue, 2nd in average ROA, 3rd in average ROE).4 2 BMI (2013), Vietnam food and drink report Q2 2013. p.51. 3 For example, there are 11 labels on the packaged water market, include: Lavie, Joy, A&B, Aquafina, number one, Da kai, Viltal, VĩnhHảo, Thạchbích, Kim bôi, Suốimơ. 4 Vietnamnet.vn (2014).The food & drink sector is shined by the competition. http://vietnamnet.vn/vn/kinh- te/156350/nganh-thuc-pham---do-uong--toa--sa-ng-tu-canh-tranh.html. Assessed by 8/3/2014.
  28. 28. 9 Manufacturing  enterprises  on  the  beverages  industry   In term of number of enterprises, the beverages industry has been expanding substantially (see Table 2). In the period from 2005-2011 the number of enterprises in beverages industry has increased from 762 to 1741 at the average growth rate of 14.7%. Most importantly, newly established enterprises are mainly in non-alcoholic sector. The average growth rate of non-alcoholic enterprises in the period 2005-2011 is 17.3%, accounting for 82.4% of total enterprises in 2011. Table 1. Manufacturing enterprises on the soft industry in the period 2000- 2011 Number of enterprises Enterprises distribution Average growth rate (%) 2000 2005 2011 2000 2005 2011 2001- 2005 2006- 2011 Alcohol 150 210 306 26.8% 27.6% 17.6% 8.00% 9.14% Non-Alcohol 410 552 1435 73.2% 72.4% 82.4% 6.13% 17.26% Total 560 762 1741 100% 100% 100% 6.35% 14.76% Source: Phan Hữu Thắng (2014), Overview of food and beverage industry, presentation at the forum: Prospects of the food and beverage industry in Vietnam. Hanoi, March 28th 2014. The beverages industry in Vietnam also witnesses rapid development of domestic enterprises. They are now playing a more important role and gradually take control of important parts of the market. Domestic enterprises accounts for 93.7% of total number of beverages enterprises in 2011. In which, non- state of enterprises account for 85% of total number of manufacturing enterprises on the industry. Some of them become key players in the markets such as Vinamilk, Trung Nguyen, Tang Hiep Phat, Tribeco,... The domestic enterprises are gradually increasing strength and presence controlling different parts of the soft drink market and expand to the region. In the case of Tan Hiep Phat, for example, they control still packaged RTD Tea by different branches, i.e. 00 green tea, Dr. Thanh tea, etc. Another example in beer sector is Saigon Beer (Sabeco), Hanoi Beer (Habeco) which gradually grasped the market from Chinese beer (VạnLực Beer) and now dominates the market.
  29. 29. 10 Table 2. Key players in Vietnam's beverages sector Companies Sub-sector Sales (VND bn) Sales (US$mn) Year Ending Employees Year Est. Coca-Cola Vietnam Beverages - Soft drinks na 180.0 (e) 2011 1,182 1994 Habeco Beverages - Alcoholic 3,416 165.4 2011 na na Hanoi Milk JSC Food and beverages - Dairy 282 13.5 2011 na 2001 Nestlé Vietnam Food and beverages 827.1 40.0 2011 na 1995 Pepsi-IBC Vietnam Beverages - Soft drinks na 145.0 (e) 2011 na 1991 Sabeco Beverages - Alcoholic 24,332 1,178.1 2011 na na Tribeco Beverages - Soft drinks 742 35.9 2011 1,250 1992 San Miguel Purefoods Vietnam Food and beverages - Miscellaneous na 105.0 (e) 2011 na na Tan Hiep Phat Group Beverages - Alcoholic &Soft na 25.8 (e) 2011 2,000+ 1994 Trung Nguyen Corp Beverages - Coffee na 129.0 (e) 2011 na 1996 Unilever Vietnam Food and beverages EUR18.9bn* 24,692.9 2011 5,500 1995 Vietnam Brewery Ltd Beverages - Alcoholic na 155.0 (e) 2011 500 1991 Vinacafe Bienhoa JSC Beverages - hot drinks na 30.9 (e) 2011 na 1969 Vinamilk Beverages - Dairy 26,500 (e) na 2012 3,000 1976 Source: BMI (2013), Vietnam: Food and Drink report Q2 2013. Box 1: The global aspirations of Vinamilk Established in 1976, today Vinamilk (Vietnam Dairy Products JSC.) is the biggest company in beverage sector, ranked 2nd of the top 500 Vietnamese largest private companies (VNR500) in 2013. The company accounts for 70% Vietnam's dairy market, making total revenue of VND 27,102 billion and average growth rate of 34% in the period 2008-2012. In 2012, profit before tax was 6,930 billion dong, grown 50% per year in the period 2008-2012. In 2010, the company was honoured and awarded to the Top 200 best Asia enterprises in 2012 of prize by Forbes Asia. It is the first time a Vietnamese company was awarded the Prize of Forbes Asia. At the same time, the company realized its plan of investment abroad by investing US$ 8.475mn to a dairy processing factory in New Zealand. The company targetsUSD 3billion revenue and the 1st position in the biggest 50 dairy enterprises in the world. Source: Vinamilk, 2012, The annual report 2012
  30. 30. 11 The  structure  of  the  Vietnam  beverages  industry   The structure of beverages industry in Vietnam includes non-alcoholic drinks & alcoholic drinks. During the period 2002-2012, in term of volume, non- alcoholic drinks gradually went down, along with the increase of alcoholic drinks. Non-alcoholic drinks accounted for 65.86% in 2012, lower than 76.86% in 2002. At the same time, the percentage of alcoholic drinks increased from 23.14% to 34.14%. Alcoholic drinks increased by slower rate as a result of the application of excise tax since 2008. In term of value, however, during the period 2008-2012 there is not much change in the structure of the industry. Prices of non-alcoholic drinks increased recently. In the last few years, average price of non-alcoholic drinks increased by 7.8% and price increase reached 14% in 2011. By comparison, the price of alcoholic drinks increased by an average of 5% in the same period, with the lowest 3% in 2009 to 8% in 2012. Figure 1. Structure of Vietnam soft drink industry Source:Canadean Ltd. Non-­‐alcoholic  soft  drinks   Non-alcoholic soft drinks includes packaged water, sparkling (carbonated) drinks, juice drinks, sport drinks, energy drinks, tea, coffee, dairy/soy drinks, 76.68% 74.86% 71.64% 70.80% 70.06% 69.67% 68.27% 67.17% 66.54% 65.97% 65.98% 23.32% 25.14% 28.36% 29.20% 29.94% 30.33% 31.73% 32.83% 33.46% 34.03% 34.02% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Non-Alcoholic Alcoholic
  31. 31. 12 and other non-alcoholic drinks. During the period 2002-2012 substantial changes in soft drink sector happened largely in tea and coffee. These were main types of drinks in Vietnam previously. In 2002, tea, coffee and dairy/soy beverages accounted for up to 82.6% of non-alcoholic drinks in term of volume, in which tea accounted for more than 50%. The share of tea, coffee and dairy/soy beverages reduced considerably in the aforementioned period. The share of tea decreased to 41.91% in 2008 and 39.92% in 2012. Similarly, the share of coffee went down from 15.3% in 2002 to 11.99% in 2008 and 8.87% in 2012. At the same time, share of dairy/soy drinks increased from 17.12% in 2002 to 21.59% in 2006 and was 21% to 2012. This increase in the dairy/soy drinks is seen as main achievement of the National Strategy on Nutrition in the period 2000-2010, which aims at raising the consume of dairy drinks of the people. 5 Table 3. The volume structure of non-alcoholic soft drinks (both RTD and NRTD), 2002-2012 (%) Items 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Packaged Water 3.29 3.79 4.85 5.71 6.57 7.01 6.92 8.02 8.36 8.60 9.00 Sparkling (carbonated) drinks 5.76 5.33 5.38 5.65 6.27 6.78 7.32 7.53 8.30 8.38 8.48 Juice & Juice Drinks 0.65 0.67 0.89 1.06 1.51 1.60 1.69 1.78 1.87 1.86 1.80 Sports drinks 0.02 0.02 0.03 0.07 0.07 0.09 0.05 0.05 0.16 0.28 0.36 Energy drinks 2.94 3.11 3.77 4.10 4.73 5.24 4.06 4.91 5.19 5.53 6.29 Tea 50.15 48.48 48.43 47.48 44.71 41.60 41.91 42.01 41.12 40.59 39.97 Coffee 15.33 15.20 15.33 13.71 13.21 12.44 11.99 10.04 9.67 9.35 8.87 Dairy/Soy drinks 17.12 18.52 19.84 21.25 21.70 20.97 21.59 21.23 21.23 21.48 21.55 Other non-alcoholic drinks 4.74 4.87 1.49 0.97 1.25 4.27 4.47 4.43 4.11 3.94 3.68 Source:Authors’s estimation from data provided by Canadean Ltd. 5 The National Strategy on Nutrition aim at the target that in 2015 Vietnamese consummes 1.9 billion litter of dairy drinks, estimates average 21 litter/person per year. In 2025, the total dairy drinks reach 3.4 billion litter, estimating average 34 litter/person per year (Source:http://www.dairyvietnam.com/vn/Sua-Viet-Nam/Co-hoi- phat-trien-cho-nganh-sua-Viet-Nam.html, assessed by 09/3/2014)
  32. 32. 13 Considering market structure of tea, coffee and dairy/soy drinks in 2002 in term of type of readiness, ready-to-drinks (RTD) accounted for small share (31%, 32%, 45.71% respectively)6 of the total RTD and NRTD beverages. However, share of RTDs increased over time in the last decade. Share of RTD tea increased sharply from 30.84% in 2002 to 52.26% in 2012. This shows a dramatic change in the preferemce of the population on RTD tea. There are many brands of RTD tea nowadays such as 00 green tea, C2 tea, etc.7 The share of RTD coffee raised at slower pace than one of RTD tea8 (in 2012, the share of RTD coffee was 45.95%, went up 13.86% compared to 2002). Beside, since 2010, the proportion of RTD tea has gone down slowly (reached 46.67% in 2010, down to 46.43 in 2011, to 45.95% in 2012). Concerning non-alcoholic Not-Ready-To-Drinks (NRTD) beverages, there is unclear trend. In comparison with NRTD, the proportion of RTD dairy/soy beverages9 is increasing10 . With the improvement in living standards, the soft drinks market developed strongly and is more diversified. The share of the other non- alcoholic drinks also has been increased. Energy drinks for example, increased their share from 2.94% in 2002 to 6.29% in 2012. Sparkling drink, packaged water show the same trend of increase. Table 4. The value structure of non-alcoholic soft drink, 2008-2012 (%) Items 2008 2009 2010 2011 2012 Packaged Water 4.05 4.36 4.64 4.53 4.70 Sparkling (carbonated) beverages 8.38 8.50 9.22 10.43 10.35 Juice & Juice Drinks 2.21 2.33 2.46 2.67 2.55 Sports beverages 0.06 0.06 0.16 0.23 0.31 Energy drinks 5.91 6.91 7.10 6.82 8.19 Tea 27.15 29.12 29.24 29.10 29.72 6 The figures in this section, if not otherwise stated, are estimated from the data provided by Canadean Ltd. 7 Average annual growth rate of packaged tea was 300%/year in 2005-2012 (from 5.2 million units in 2005 to 130.5 million units in 2012). Meanwhile, unpackaged tea increased only 3.36%/year in the same period. The impressive growth of packaged tea was the main reason to increase quickly the share of RTD of tea. 8 RTD coffee is unpackaged coffee (97.76% in 2012). Packaged coffee only joined the market since 2008, and their volume is very small. In 2012, their volume was only 0.6 million units. 9 RTD dairy/soy beverages mainly are unflavored dairy and unflavored coy beverages (accounted for 67% and 98.4% of the volume of each). 10 Even though the increase is very small increase (about 1.1% from 2002 to 2012)
  33. 33. 14 Items 2008 2009 2010 2011 2012 Coffee 20.34 17.05 15.85 16.26 15.15 Dairy/Soy beverages 25.46 25.48 25.87 24.17 23.77 Other non-alcoholic beverages 6.45 6.19 5.46 5.79 5.28 Source:Authors’s estimation from data provided by Canadean Ltd. In term of value, table 4 shows that, tea, coffee and dairy/soy drinks are the main products in the market. In 2008, tea, coffee and dairy/soy drinks altogether contributed 72.95% of the market value of non-alcoholic drinks. The share of tea, coffee and dairy/soy drinks has decreased in the last few years, reaching at 68.64% of the market value of non-alcoholic drinks in 2012. In term of price change, from 2008-2013 price change of core sparkling drinks is highest at 8% per year. Most of price changes happened in 2011. Juice drinks price increased second after core sparkling drinks at the average of 6.4% per year during the same period. In general, non-alcoholic drinks price increased by 6.2% per year during the period 2008-2012. This level does not keep up with the change in inflation of the country at the same period. Table 5. Average price and change in prices of non-alcoholic drinks, 2008- 2012 (USD/unit, %) 2008 2009 2010 2011 2012 2008-2012 Price Price Up Price Up Price Up Price Up Price Up Packaged Water 2.4 2.4 -1.6% 2.6 9.3% 2.8 8.2% 2.8 0.9% 2.6 3.5% Core sparkling beverages 4.7 4.9 4.5% 5.1 5.2% 6.6 27.9% 6.5 -0.5% 5.6 8.0% Juice & Juice Drinks 6.7 6.9 3.5% 7.1 3.1% 8.8 23.3% 8.8 0.4% 7.6 6.4% Sports beverages 4.4 4.6 3.9% 4.8 3.7% 4.4 -7.2% 4.6 3.2% 4.6 0.6% Energy drinks 5.9 6.1 2.4% 6.3 3.8% 6.5 3.1% 7.0 7.3% 6.4 3.5% Tea 6.9 6.5 -6.1% 6.6 2.5% 7.4 12.1% 7.6 2.8% 7.0 2.2% Coffee 17.7 16.4 -7.5% 16.3 -0.5% 19.8 21.8% 20.0 0.8% 18.0 2.6% Dairy/Soy beverages 10.3 11.4 10.5% 12.2 7.4% 12.8 5.1% 12.7 -1.3% 11.9 4.6% Other non-alcoholic beverages 5.9 6.1 2.5% 6.2 1.9% 7.8 26.2% 7.7 -0.7% 6.7 6.2% Non-alcoholic beverages 4.1 4.4 5.8% 4.7 6.9% 5.3 14.0% 5.4 1.8% 4.8 6.3%
  34. 34. 15 Source:Authors’s estimation from data provided by Canadean Ltd. In term of non-alcoholic carbonated soft drinks, this sector has experienced dramatic changes in the past decades. The number of enterprises in the sector has increased from 410 in 2000 to 1,435 in 2011. The share of number of enterprises operating in non-alcoholic carbonated soft drinks in total enterprises of beverage industry has increased from 73.2% in 2000 to 82.4% in 2011. The share of number of foreign invested enterprises in the industry is small compared to SOEs and domestic private enterprises. However, it has increased from 1.7% in 2000 to 6.3% in 2011. Foreign invested enterprises accounted for 18.7% of non-alcoholic soft drinks in 2000. This figure has increased to 30.1% in 2011.11 Table 6. Share of enterprises in carbonated soft drinks category Name Share (%) 2011 2012 2013 Pepsi 54% 54% 56% Coca-Cola 28% 30% 29% THP 3% 2% 3% Others 15% 14% 12% Source: Nielsen RMS NTW Within carbonated soft drinks category, foreign invested enterprises account for 82% share of this category in 2011 & increased to 85% in 2013. Alcoholic  drinks   Alcoholic beverages include beer and the other alcoholic beverages (flavored alcoholic beverages12 and other alcoholic beverages). In Vietnam, alcoholic drinks are subject to excise tax. According to the law on excise tax 2008, from 1/1/2010 to 31/12/2012, the excise tax rate on alcohol of over 200 is 45%; on beer, the rate is 45%. Since 1/1/2013, the rate on alcohol of over 200 is 50%; the rate on beer is 50%. Beers dominate the alcoholic drink market in Vietnam. The share of beer in total volume of alcoholic drink gradually increased in 2002-2012, and 11 PhanHữuThắng (2014), Overview of food and beverage industry. The forum: Prospects of the food and beverage industry in Vietnam. Hà Nội, March 28th 2014. 12 Flavored Alcoholic Beverages accounted for a very small share of volume, compared to other alcoholic beverages. In 2012, reached only 0.3 million units (0.04%).
  35. 35. 16 accounted for 93.73% in 2012 (604.9 million units). Average annual growth rate of beer was 10.37% in the period 2002-2012, higher than the growth rate of alcoholic beverages. Compared with beer, the volume of other alcoholic beverages increased slowly. Average annual growth rate was only 5.8%, keeping closely pace with the growth of the economy. In 2012, the growth rate of the other alcoholic beverages was 2.8%, reached 40.5 million units. Considering the structure of alcoholic drinks value, beer takes most of the market, too. The share of beer in total alcoholic drink market value increased from 91.98% in 2008 to 93.73% in 2012. Average annual growth rate of beer reached 17.22% in 2008-2012. Given the situation of the economy in the period from 2008-2012, this growth rate is a great achievement for beer producers and importers. In 2012, beer value increased 18.14%, reached US$ 5,870.6 million. Average annual growth rate of the other alcoholic beverages reached only 9.7%/year (Table 7). Table 7. Alcoholic drink market value structure, 2008-2012 (%) 2008 2009 2010 2011 2012 Beer 91.98 92.47 92.98 93.38 93.73 Total Other Alcoholic Drinks 8.02 7.53 7.02 6.62 6.27 Source:Canadean Ltd.
  36. 36. 17 In term of volume, household-made spirit accounts for a large share of alcoholic drinks. Table 8 shows the volume and share of other alcoholic drinks in the period 2000-2011. The share of household-made spirit is the largest, but falling steadily. Despite of this falling, household-made spirit still account for over 76% in 2011. The share of pure spirit stronger than 25 degree increases by 11.9 percentage points from 3.76% in 2000 to 15.7% in 2011. Others also increase by small percentage. Table 8. The volume structure of other alcoholic drinks in 2000-2011 Volume Share (%) 2000 2005 2011 2000 2005 2011 Spirit stronger than 25 degree 4.7 13.1 52.6 3.76 5.93 15.7 Liqueur 3.5 2.1 6.8 2.85 0.96 2.1 Champagne 0.3 0.3 1.0 0.24 0.13 0.3 Wine from fresh fruits 6.3 8.6 16.8 5.08 3.91 5.2 Household-made spirit 109.3 196.9 248.7 88.07 89.07 76.8 Total 124.2 221.1 322.6 100 100 100 Source: Phan Hữu Thắng (2014), Overview of food and beverage industry. The forum: Prospects of the food and beverage industry in Vietnam. Hà Nội, March 28th 2014. Box 2: The beer sector of Vietnam Domestically produced international brands include Heineken,Fosters, Tiger, Carlsberg and San Miguel, in which the first three produced by Asia Pacific Breweries(APB). APB has brewingfacilities in 13 different high growth markets- Singapore, Malaysia, China, India,Vietnam, Thailand, etc. Its flagship product is its Tiger beer brand. A number of foreign players have invested in the Vietnamese market, including the Danish major Carlsberg (operating both alone and via a joint venture with Habeco); UK spirits leader Diageo(operating bothalone and through a partnership with Halico); etc. In spite of the growing presence of multinationals in the market, local firms continue to dominate. The sector remains highly-regionalised, with Habeco (Hanoi Alcohol Beer and Beverage Company) dominating the north of the country and Sabeco (Saigon Beer Alcohol Beverage Corporation being the key player in the south. Sabeco and Habeco- both state-backed brewers- control an impressive 34% and 19% of the local beer market respectively. Therefore, domestic brands continue to lead overallsales in the Vietnamese beer market. Source: BMI (2013), Vietnam: food and drink report Q2 2013.
  37. 37. 18 Methodology  and  approaches   Price  elasticity  approach   Economics law tells us that, all else equal, when the price of a particular good falls, the quantity demanded for that good rises. The law tells us a negative relationship between price of and demand for a good but does not tell us the magnitude of this relationship. This magnitude is measured based on the concept of price elasticity, which reveals the degree of sensitivity of demand for a good to the change in its price. Specifically elasticity describes the percentage change in demand for a good as a result of one percent change in its price. Mathematically, this relation is shown in the following equation: / / d Q Q E P P Δ = Δ where Ed is price elasticity of demand, /Q QΔ is percentage change of demand and /P PΔ is percentage change of price. The demand for one good is not only affected by its own price but also by price of other goods. The nature of the relationship and magnitude of the relationship are revealed by the cross-price elasticity. This indicator refers to the percentage change in the quantity demanded for a good that result from one percentage increased in the price of another good. Mathematically, the cross-price elasticity is shown in the following equation: ( ) ( ) / / yx x x QxPy x yy y PQ Q Q E Q PP P Δ Δ = = ΔΔ where QxPyE is the cross-price elasticity of the good X in relation to the change in the price of the good Y. xQ denotes the quantity of good X, yP denotes price of good Y. Δ denotes change in quantity and price. The good Y will be called substitute of the good X if the above cross-price elasticity is positive. In other words, an increase in price of good Y will result in an increase the demand for good X. Otherwise it is called complement of good X is the above cross-price elasticity is negative. Or an increase in price of good Y will result in a decrease in the demand for good X. The following table shows different cases of price elasticity of demand.
  38. 38. 19 Table 9. Elasticity Value Descriptive Terms Perfectly inelastic demand Inelastic or relatively inelastic demand Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand Elastic or relatively elastic demand Perfectly elastic demand Price change can affect revenue or output of a commodity by two channels: (i) the price effect, where an increase in price of an elastic good will result in reduction of revenue (and increase in revenue for inelastic good); (ii) quantity effect, where an increase in price will tend to cause a reduction of quantity demanded for good. The combination of the two effects will define the net effect of a price change on revenue or output of a commodity. The following table summarizes the net effect of price change over the revenue in accordance to the price elasticity of demand of a commodity. Table 10. Net effects on revenue Value Net effects Changes in the price do not affect the quantity demanded for the good; raising prices will always cause total revenue to increase Since price elasticity of demand is relatively inelastic the percentage change in quantity demanded is smaller than that in price. Therefore, total revenue will increase when price rises, and vice versa. In this case the percentage change in quantity is equal to that in price, so a change in price will not affect total revenue The percentage change in quantity demanded is greater than that
  39. 39. 20 in price, therefore if price increases, total revenue falls, and vice versa Perfect elasticity means that an increase in price will cause the demand falls to zero, therefore total revenue will fall to zero. Excise  Tax  and  its  impact   While excise tax is used widely in the world today on selective goods and services, a discriminatory excise tax on carbonated soft drinks is uncommon. The government uses excise tax as a mean to raise their budget, collect fees on government services and public goods, control negative externalities whose costs are ignored by producers, and discourage the use of potentially harmful substances. In Vietnam excise tax applied on gasoline, tobacco, liquor and beer contribute a significant part on the government revenue.13 The impact of excise tax on the consumption of taxed commodities and services toward the wishes of the government depends on the price elasticity of demand for those goods and services. What the excise tax does is to increase the cost of consumption for a certain good or service and hence affects the consumer’s behavior. If demand for a good or service is elastic, an imposition of excise tax will reduce the consumption of that good or service with the magnitude larger than the change in price of that good or service. As a result the government revenue target cannot be obtained, but it can achieve the purpose of reducing the consumer consumption of that specific good or service. The cost of excise tax does not stop at the consumer level, but can affects sellers by shifting of tax burdens via supply elasticity. The sellers will become main bearers of the excise tax if supply is relative inelastic to price while demand is elastic. Moreover, in a general equilibrium setting the reduction in consumption is finally landed at the production side. And therefore producers will also pay the cost for the application of excise tax by the government. An  empirical  approach  to  elasticity  measurement   In this study we assume that relationship between price and quantity demanded of carbonated soft drink is non-linear. To conduct a linear regression analysis, a 13 See Annex II for the full list of current commodities and services that are applied excise tax with the tax rates
  40. 40. 21 transformation is applied where the double log models is used. Particularly a log-log model is estimated to establish the demand function of carbonated soft drink. The log-log functional form is as follows: Functional form: lnY = β1 + β2lnX For this functional form, the slope parameter is a direct measure of elasticity, i.e, elasticity is ε = β2. From the functional form, an empirical estimation is conducted in the following functional form: lnY = β1 + β2 lnP + β3 ln X1 +... + βn ln Xn +αm ln XpXq( )+ e where Y is the quantity demanded, P is price, X1 to Xn is control variables (in this case we analyse the relationship of quantity demanded and prices of other drinks, e.g. fruit juice, energy drink, packed water and soya milk), interaction between control variables, and e is residual. We use a database of monthly volumes and values of soft drinks sold in the market of the 6 largest cities/provinces in Vietnam in the period from 2007 to 2013. The results of empirical estimation is presented and discussion in section 4 of this study. General  equilibrium  approach   The price elasticity approach let us see only partially the impact of excise tax imposition on the soft drink industry in Vietnam, i.e. impact on quantity demanded of carbonated soft drink and government revenue from the industry. To analyse the impact on the economy, particularly production side, we use CGE (Computable General Equilibrium) approach. This approach is well-suited to analyzing the impacts of industrial and sector-level policies. First, CGE models simulate the functioning of a market economy, including markets for labour, capital and commodities, and therefore can evaluate how changing economic and natural resource conditions are mediated via prices and markets. Secondly, CGE models ensure that all economy-wide constraints are respected, which is crucial for studies concerned with inter-sectoral linkages or spillover effects. Finally, CGE models contain detailed sector breakdowns and provide a “simulation laboratory” for quantitatively examining how changes in the non beverage drinks influences the performance and structure of the whole economy, particularly in terms of changes in tax rates.
  41. 41. 22 Economic decision-making in the model is the outcome of decentralized optimization by producers and consumers within a coherent economy-wide framework. This is reflected in the conceptual framework for the model presented in Figure below. Production occurs under constant returns to scale. Intermediate demand is determined by fixed technology coefficients (i.e., Leontief demand), while constant elasticity of substitution (CES) production functions allow factor substitution based on relative prices. This means that, for example, as unused crop land in Vietnam becomes scarcer, producers have some ability to substitute land for less scarce factors, such as labour and capital. Profit maximization implies that factors receive income where marginal revenue equals marginal cost. The model identifies 63 sectors where soft drinks stand as a separate sector. Figure 2. Conceptual Framework for the Economy-wide Model Substitution possibilities exist between production for the domestic and the foreign markets. This decision of producers is governed by a constant elasticity of transformation function, which distinguishes between exported and domestic goods. Profit maximization drives producers to sell in those markets where they can achieve the highest returns based on domestic and export prices. Further substitution possibilities exist between imported and domestic goods under a CES Armington specification. This takes place in both final and intermediates usage. Under the small-country assumption, world demand and supply is assumed to perfectly elastic at fixed world prices, with the final ratio of traded
  42. 42. 23 to domestic goods being determined by the endogenous interaction of relative prices. The model distinguishes between 30 representative households that are disaggregated across the two sub-national regions (i.e., Mekong Delta and RoV), by farm/nonfarm, fish/crop-only farms, and by per capita expenditure quintiles. Households receive income in payment for producers’ use of their factors of production, and then pay direct taxes, save (i.e., invest) and make foreign transfers (all at fixed rates). Households then use their remaining income to consume commodities under a linear expenditure system (LES) of demand. The government receives revenues from imposing direct and indirect taxes, and then makes transfers to households and the rest of the world. The government also purchases commodities in the form of recurrent consumption expenditures, and the remaining income of the government is saved (with budgets deficits representing negative savings). All savings from households, government and the rest of the world (foreign savings) are collected in a savings pool from which investment is financed. The model includes three broad macroeconomic accounts: the government balance, the current account, and the savings-investment account. In order to bring about balance among the various macro accounts, it is necessary to specify a set of ‘macro-closure’ rules, which provide a mechanism through which macroeconomic balance can be achieved. A savings-driven closure is assumed in order to balance the savings-investment account. Under this closure, the marginal propensities of households to save are fixed, while investment adjusts to income changes to ensure that the level of investment and savings are equal. For the current account it is assumed that a flexible exchange rate adjusts in order to maintain a fixed level of foreign savings. In other words, the external balance is held fixed in foreign currency terms. Finally, in the government account, direct tax rate rates are fixed and the fiscal deficit adjusts to equate total revenues and expenditures. The model is calibrated to the 2011 social accounting matrix (SAM). This SAM is updated from 2007 SAM by CIEM in which we assume that the structure of the economy is unchanged and updates 2011 data. In addition, the information used to disaggregate households in the SAM was drawn from 2010 VHLSS that is the most updated household survey in Vietnam.
  43. 43. 24 The model distinguishes between 30 representative households that are disaggregated across the two sub-national regions (i.e., Mekong Delta and RoV), by farm/nonfarm, fish/crop-only farms, and by per capita expenditure quintiles. The model is calibrated to the 2007 social accounting matrix (SAM) of Vietnam as introduced in Chapter 2 of this report. For this chapter, the national SAM is regionalized to separate out the Mekong Delta, for whom the fisheries sectors play an especially important and unique role. Moreover, a more detailed structure of the fisheries sector is included to isolate the indirect economic linkage that fish feed plays between ocean fisheries and aquaculture. The information used to disaggregate households in the SAM was drawn from 2006 VHLSS. Impact  of  excise  tax  imposition   Empirical  results:  impact  on  the  industry   In thisempirical analysis, for the own price elasticity of the non-alcoholic sparkling soft drink and cross-price elasticity of other soft drinks, we conduct a regression for the following functional form: lnY = β1 + β2 lnP + β3 ln X1 +... + βn ln Xn +αm ln XpXq( )+ e where Y is the quantity demanded, P is price, X1 to X2 is control variables (in this case we analyse the relationship of quantity demanded and prices of other drinks, e.g. fruit juice, energy drink, packed water and soya milk), interaction between control variables, and e is residual. Particularly, in the empirical regression we consider the relationship between sparkling (carbonated) soft drink (SSD) and its price. Also, in the following regressions, we analyse the relationship between quantity demanded of other soft drinks and price of carbonated soft drink. In the regression for the relation between carbonated soft drink (SSD) and its price, control variables included are the increase in income of the consumers, proxied by growth in GDP, price of energy drink, price of fruit juice, price of packaged water, price of soya milk and the interaction between its own price and price of energy drink. The regression results based on database collected from 6 largest cities/provinces in Vietnam are presented as follows:14 14 See Annex I for the full results of the regression as reported by Statistical Software STATA 12.
  44. 44. 25 2.81* 0.0009* 3.98* 0.96* 1.98* 0.55* 1.81* SSD SSD ED FJ PW SM SSDED Y P dGDP P P P P PP = − + + − − − + (Eq 1) The results show that, carbonated soft drinks are very sensitive with the change in price. Particularly, the quantity of carbonated soft drinks demanded will reduce by 2.8% if their price is up by (+1%). With this high price elasticity of demand, the total revenue of the sector will reduce with any increase price of the items. From the results of the regression we can project the impact of an increase of carbonated soft drinks price on its volume demand as well as the impact government revenue from the industry. The results show that a 10% increase of price due to the imposition of excise tax as proposed in the draft of revised law on excise tax therefore will result in 28% reduction of demand for carbonated soft drinks.15 The projection shows that, the impact of an imposition of excise tax of 10% on the sale of carbonated soft drinks in 6 largest cities/provinces in Vietnam is significant. The application of proposed excise tax will result in a reduction of - 825,100 units in quantity demanded. As a result, a loss of VND 851 billion (equivalent to about USD 40.5 million) to the carbonated soft drink industry.16 Table 10 represents the detailed estimation. Table 11. Effects of Excise Tax of 10% on Carbonated Soft Drinks in 6 largest cities/provinces No Items Carbonated Drinks Industry 1 Price elasticity of carbonated soft drinks -2.8 2 The quantity average demand in 2013 ('000 units17 ) 3,927 3 Average sale value in 2013 (million vnd) 470,822 4 Total sale value in 2013 (million vnd) 5,649,864 5 Average price of carbonated soft drinks ('000 vnd) 120 15 See Annex I for the full results of the regression as reported by Statistical Software STATA 12. 16 Please keep in mind that this is a partial impact of excise imposition on carbonated soft drink industry given the available data is of 6 cities/provinces among 63 provinces of the country and it is estimated with the use of own price elasticity of carbonated soft drink, while excise imposition on carbonated soft drink can affects other types of soft drinks as well. 17 The unit is unit case used in the soft drink industry, which is equivalent to 5.678 litre
  45. 45. 26 No Items Carbonated Drinks Industry 6 Proposed excise tax rate on carbonated soft drinks (%) 10 7 Price after excise tax 129 8 Quantity of carbonated drinks after excise imposition ('000 units) 3,102 9 Loss/gain of quantity demanded of carbonated drinks ('000 units) -825 10 Average sale value after excise imposition (million vnd) 399,846 11 Loss/profit in a month(million vnd) -70,976 12 Loss/profit in a year(million vnd) -851,717 As these impacts taking place, the substitution effect of the excise tax imposition on carbonated soft drinks will happen and benefit other beverage categories. Hence the proposed excise tax on carbonated soft drinks could be deemed discriminatory in nature which may raise question among foreign non- alcoholic beverage players. Empirical  results:  impact  on  the  economy   In previous section, we project the partial impact on the carbonated soft drink industry alone by the using the own price elasticity of demand of carbonated drinks. Another question can be raised about the impact of such imposition of excise tax on an industry, carbonated soft drinks in this case, to the whole economy. To answer this question, a CGE is built and used as described in previous section. Before estimating the impact of the excise imposition on carbonated soft drink industry on the whole economy, it is necessary to first specify a baseline scenario that reflects development status of Vietnam in 201118 . The baseline provides foundations for growth and structural change of the economy in 2011 that can be used as a basis for comparison. Economic growth in the CGE model is determined by rates of factor accumulation and technical change. The assumed values for the baseline are shown in Table 9 below. 18 The CGE model is built by CIEM using IO table for 2007 and updated with 2011 data of SUT (supply and use table). This is the most current available data for CGE analysis in Vietnam.
  46. 46. 27 Table 12. Vietnam in 2011 Items Value GDP by current price (billion VND) 2,535,008 Agriculture, forestry and fishing 558,284 Industry and construction 1,034,057 Service 942,667 Structure of GDP (%) 100.00 Agriculture, forestry and fishing 22.02 Industry and construction 40.79 Service 37.19 GDP by expenditure category at current prices(billion VND) 2,535,008 Gross capital formation 827,032 Gross fixed capital formation 745,494 Changes in stocks 81,538 Final consumption 1,794,465 State 164,323 Private 1,630,143 Trade balance (goods & services) (106,852) Statistical discrepancy 20,363 GDP by expenditure category at current prices (%) 100.00 Gross capital formation 32.63 Gross fixed capital formation 29.41 Changes in stocks 3.22 Final consumption 70.79 State 6.48 Private 64.31 Trade balance (goods & services) -4.22 Statistical discrepancy 0.8 Source: GSO (2012) In the scenario where the government applies the proposed excise tax of 10% on carbonated soft drinks, the reduced demand finally causes reduction in output and production of the industry. As a result, carbonated soft drink industry’s customers and suppliers also suffer from the reduction in carbonated soft drink industry. The input price increases for the customers while the output reduces
  47. 47. 28 for the suppliers of the carbonated soft drink industry. Moreover, income of household is also affected since reduction in output of the industry means a reduction of jobs created. A 10% excise tax applied on carbonated soft drink will not transfer totally as 10% tax on the carbonated soft drink industry since the share of carbonated soft drink is about 50% of the total industry production. The simulation of 10% excise tax imposition on carbonated soft drink that takes into account the share the carbonated soft drink in the industry shows that quantity of domestic productions of beverage products decreases by 0.58 percent. The imposition leads to the decline of total aggregate demands or GDP by 0.01 percent. This equivalent to a decrease of VND 253.5 billion, or USD 12.1 million. Empirical  results:  impact  on  the  Government  budget   By applying two approaches analyzing the partial impact of excise tax on the carbonated soft drink industry and the economy, partial impact on government revenue can also be revealed. The projection from elasticity analysis shows that, increase in government revenue from excise tax on carbonated soft drinks is anticipated to reach VND 396.5 billion, equivalent to USD 18.9 million. However, based on price elasticity, as excise tax pushes up prices, consumption and sales volume are likely to reduce. As such government excise tax revenue would also be reduced. Furthermore, as consumption and sales volume reduce, it is likely that government revenue from value added tax would further reduced by VND 85.2 billion (USD 4.1 million).19 Government revenue from enterprise income tax would also be reduced due to the reduction of total sale of carbonated soft drink. The loss of enterprise income tax is projected to be about VND 77.1 billion (USD 3.7 million) (see table 12 for more detail).20 Therefore it is projected that total government revenue increase from imposition of excise tax on carbonated soft drink will only reach VND 234.3 billion (USD 11.16 million) Table 13. Impact on government revenue from elasticity approach 19 A rate of 10% of value added tax is applied in Vietnam for carbonated soft drink industry. We assume that total reduction in revenue due to application of excise tax is from value added. 20 This is estimated based on the coefficient between enterprise income tax and value added tax payed by enterprises. In Vietnam, value added tax is usually higher than enteprise income tax. This coefficient is estimated and equals 0.905
  48. 48. 29 No Government budget components (million VND) Carbonated Drinks Industry 1 Increase in government revenue due to excise tax imposition 396,541 2 The loss of value added revenue -85,172 3 The loss of enterprise income tax -77,105 4 Government revenue (revenue subtracted by losses) 234,264 Considering impact on GDP using CGE approach, imposition of excise tax on carbonated soft drinks will reduce GDP by USD 12.1 million which in turn will reduce government revenue further by VND 56.5 billion or USD 2.7 million.21 Therefore, it can be estimated based on available data and regression analysis along with the CGE simulation, the imposition of excise tax on carbonated soft drinks will only generate merely USD 8.46 million less than half of the amount anticipated originally... This revenue again came at the cost of a total loss of USD 52.6 million (VND 1,105 billion) to the economy. (Soft drink industry revenue loss of USD 40.5 million or VND 851 billion and USD 12.1 million or VND 253.5 billion loss to other sectors) It is worth to emphasize that the above projected revenue from imposition of excise tax on carbonated soft drinks could be reduced even further as the impacts of carbonated soft drink excise tax on other soft drinks and related items are not included. The costs of collecting excise tax is not covered neither. Furthermore, this impact analysis covers only 6 cities/provinces whose data on carbonated soft drinks are available for meaningful regression analysis. Therefore we can anticipate that the if taken into consideration all the parameters adversely affected by carbonated soft drinks excise tax, the government revenue gain will be much smaller than what is originally anticipated. 21 This is estimated as government tax revenue in GDP. The coeficent is estimated for 2011 data and equal to 0.223.
  49. 49. 30 Conclusion   Imposition of excise tax on carbonated soft drinks is being proposed by the Ministry of Finance. This study is an effort to estimate economic impacts of this imposition on the carbonated soft drink industry, government budget and the economy. Using price elasticity of demand analysis with data for largest 6 cities/provinces in term of soft drinks consumption and CGE approach with economy-wide data, our study is able to estimate partial impacts of the proposed excise tax. Our partial impact analysis shows that, if the proposed excise tax will be imposed on the carbonated soft drink industry, beside the marginal increase in government revenue the excise tax imposition results in the negative impact on the industry and other industries of the economy. Particularly, if the proposed excise tax on carbonated soft drink is applied, it will merely generate USD 8.46 million or less of revenue to the government. This marginal revenue will come at the cost of carbonated soft drink industry revenue loss of USD 40.5 million (VND 851 billion)and USD 12.1 million (VND 253.5 billion)loss to other sectors, of a total loss of USD 52.6 million (VND 1,105 billion) to the economy. Therefore, from the study, the imposition of excise tax on carbonated soft drink is questionable economically.
  50. 50. 31 References   1. BMI (2013), Vietnam food and drink report Q2 2013 2. Ministry of Finance, 2014, Statement to the Government on the Law of modification of some articles of the Law on Excise Tax 3. Phan Hữu Thắng, 2014, Overview of food and beverage industry. The forum: Prospects of the food and beverage industry in Vietnam. Hanoi, March 28th 2014. 4. The National Assembly, 2008, Law No. 27/2008/QH12 on Excise Tax 5. University of Indonesia, 2013, The profile of soft drink industry and the economic impact of excise tax imposition on carbonated drink 6. Vinamilk, 2012, The annual report 2012
  51. 51. 32 ANNEX  I.  The  empirical  elasticity  model   Source SS df MS Number of obs 82 F(7,74) 247.05 Model 8.6674 7 1.2382 Prob> F 0.000 Residual 0.3709 74 0.0050 R-squared 0.959 Adj R-squared 0.955 Total 9.0383 81 0.1116 Root MSE 0.071 lnssd Coef. Std. Err. t P>t [95% Conf. Interval] lnprice -2.8102 1.6784 -1.67 0.098 -6.154 0.534 DGDP 0.0009 0.0108 0.09 0.931 -0.021 0.022 lnpried 3.9808 0.4121 9.66 0.000 3.160 4.802 lnprifj -0.9574 0.6005 -1.59 0.115 -2.154 0.239 lnpricepw -1.9759 0.2883 -6.85 0.000 -2.550 -1.401 lnprism -0.5510 0.1578 -3.49 0.001 -0.865 -0.237 ipriceed 1.8143 0.7693 2.36 0.021 0.281 3.347 _cons -0.9174 0.8067 -1.14 0.259 -2.525 0.690    
  52. 52. 33 ANNEX  II.  Extract  of  the  Law  on  Excise  Tax   (Law No. 27/2008/QH12) Article 2. Taxable objects 1. Goods: a/ Cigarettes, cigars and other tobacco preparations used for smoking, inhaling, chewing, sniffing or keeping in mouth; b/ Liquor; c/ Beer; d/ Under-24 seat cars, including cars for both passenger and cargo transportation with two or more rows of seats and fixed partitions between passenger holds and cargo holds; e/ Two- and three-wheeled motorcycles of a cylinder capacity of over 125 cm3; f/ Aircraft and yachts; g/ Gasoline of all kinds, naphtha, reformade components and other components for mixing gasoline; h/ Air-conditioners of 90,000 BTU or less; i/ Playing cards; j/ Votive gilt papers and votive objects. 2. Services: a/ Dance halls; b/ Massage parlors and karaoke bars; c/ Casinos; prize-winning video games, including jackpot and slot games and games on similar machines; d/ Betting; e/ Golf business, including the sale of membership cards and golf playing tickets; f/ Lottery business. Article 7. Tax rates Excise tax rates for goods and services are specified in the Excise Tariff below: EXCISE TARIFF No. Goods or services Tax rate (%) I Goods 1 Cigarettes, cigars and other tobacco preparations 65 2 Liquor a/ Of 20o proof or higher From January 1, 2010, through December 31, 2012 45 From January 1, 2013 50 b/ Of under 20o proof 25 3 Beer From January 1, 2010, through December 31, 2012 45 From January 1, 2013 50 4 Under-24 seat cars a/ Passenger cars of 9 seats or fewer, except those specified at Points 4e, 4f and 4g of this Article Of a cylinder capacity of 2,000 cm3 or less 45 Of a cylinder capacity of between over 2,000 cm3 and 3,000 cm3 50 Of a cylinder capacity of over 3,000 cm3 60 b/ Passenger cars of between 10 seats and under 16 seats, except 30
  53. 53. 34 those specified at Points 4e, 4f and 4g of this Article c/ Passenger cars of between 16 seats and under 24 seats, except those specified at Points 4e, 4f and 4g of this Article 15 d/ Cars for both passenger and cargo transportation, except those specified at Points 4e, 4f and 4g of this Article 15 e/ Cars running on gasoline in combination with electricity or bio-fuel, with gasoline accounting for not more than 70% of the used fuel 70% of the tax rate for cars of the same kind as specified at Points 4a, 4b, 4c and 4d of this Article f/ Cars running on bio-fuel 50% of the tax rate for cars of the same type as specified at Points 4a, 4b, 4c and 4d of this Article g/ Electrically-operated cars Passenger cars of 9 seats or fewer 25 Passenger cars of between 10 seats and under 16 seats 15 Passenger cars of between 16 seats and under 24 seats 10 Cars for both passenger and cargo transportation 10 5 Two- and three-wheeled motorcycles of a cylinder capacity of over 125 cm3 20 6 Aircraft 30 7 Yachts 30 8 Gasoline of all kinds, naphtha, reformade components and other components for mixing gasoline 10 9 Air conditioners of 90,000 BTU or less 10 10 Playing cards 40 11 Votive gilt papers and votive objects 70 II Services 1 Dance halls 40 2 Massage parlors and karaoke bars 30 3 Casinos and prize-winning video games 30 4 Betting 30 5 Golf business 20 6 Lottery business 15
  54. 54. 35 ANNEX  III.Key  Equations  of  Standard  CGE  model  applied   EQUATIONS Price Block Eq. Import price 𝑃𝑀! = 𝑝𝑤𝑚! ∗ 1 + 𝑡𝑚! ∗ 𝐸𝑋𝑅 + 𝑃𝑄!! ∗ 𝑖𝑐𝑚!!! !!!"# 𝑐 ∈ 𝐶𝑀 (1) Export price 𝑃𝐸! = 𝑝𝑤𝑒! ∗ 1 − 𝑡𝑒! ∗ 𝐸𝑋𝑅 − 𝑃𝑄!! ∗ 𝑖𝑐𝑒!!  ! !!!"# 𝑐 ∈ 𝐶𝐸 (2) Demand price of domestic nontraded goods 𝑃𝐷𝐷! = 𝑃𝐷𝑆! + 𝑃𝑄!! ∗ 𝑖𝑐𝑑!!! !!!"# 𝑐 ∈ 𝐶𝐷 (3) Absorption 𝑃𝑄! ∗ 1 − 𝑡𝑞! ∗ 𝑄𝑄! = 𝑃𝐷𝐷! ∗ 𝑄𝐷! + 𝑃𝑀! ∗ 𝑄𝑀! 𝑐 ∈ 𝐶𝐷 ∪ 𝐶𝑀 (4) Marketed output value 𝑃𝑋! ∗ 𝑄𝑋! = 𝑃𝐷𝑆! ∗ 𝑄𝐷! + 𝑃𝐸! ∗ 𝑄𝐸! 𝑐 ∈ 𝐶𝑋 (5) Activity price 𝑃𝐴! = 𝑃𝑋𝐴𝐶!  ! !∈! ∗ 𝜃!  ! 𝑎 ∈ 𝐴 (6) Aggregate intermediate input price 𝑃𝐼𝑁𝑇𝐴! = 𝑃𝑄! !"# ∗ 𝑖𝑐𝑎!  ! 𝑎 ∈ 𝐴 (7) Activity revenue and costs 𝑃𝐴! ∗ 1 − 𝑡𝑎! ∗ 𝑄𝐴! = 𝑃𝑉𝐴! ∗ 𝑄𝑉𝐴! + 𝑃𝐼𝑁𝑇𝐴! ∗ 𝑄𝐼𝑁𝑇𝐴! 𝑎 ∈ 𝐴 (8) Consumer price index 𝐶𝑃𝐼 = 𝑃𝑄! !∈! ∗ 𝑐𝑤𝑡𝑠! (9) Producer price index for nontraded market output 𝐷𝑃𝐼 = 𝑃𝐷𝑆! !∈! ∗ 𝑑𝑤𝑡𝑠! (10) Production and Trade Block CES technology: Activity production function 𝑄𝐴∝ =∝∝ ∝ ∗ 𝛿! ! ∗ 𝑄𝑉𝐴! !!! ! + 1 − 𝛿! ! ∗ 𝑄𝐼𝑁𝑇𝐴! !!! ! ! ! !! ! 𝑎 ∈ 𝐴𝐶𝐸𝑆 (11) CES technology: Value-added intermediate-input 𝑄𝑉𝐴! 𝑄𝐼𝑁𝑇𝐴! = 𝑃𝐼𝑁𝑇𝐴! 𝑃𝑉𝐴! ∗ 𝛿! ! 1 − 𝛿! ! ! !!!! ! 𝑎 ∈ 𝐴𝐶𝐸𝑆 (12)
  55. 55. 36 quantity ratio Leontief technology: Demand for aggregate value added 𝑄𝑉𝐴! = 𝑖𝑣𝑎! ∗ 𝑄𝐴! 𝑎 ∈ 𝐴𝐿𝐸𝑂 (13) Leontief technology: demand for Aggregate intermediate input 𝑄𝐼𝑁𝑇𝐴! = 𝑖𝑛𝑡𝑎! ∗ 𝑄𝐴! 𝑎 ∈ 𝐴𝐿𝐸𝑂 (14) Value-added and factor demands 𝑄𝑉𝐴! =∝! !" ∗ 𝛿!  ! !" ∗ 𝑄𝐹!  ! !!! !" !∈! ! ! !! !" 𝑎 ∈ 𝐴 (15) Factor demand 𝑊𝐹! ∗ 𝑊𝐹𝐷𝐼𝑆𝑇!  ! = 𝑃𝑉𝐴! ∗ 1 − 𝑡𝑣𝑎! ∗ 𝑄𝑉𝐴! ∗ 𝛿!  ! !" ∗ 𝑄𝐹!  ! !!! !" !∈!! !! ∗ 𝛿!  ! !" ∗ 𝑄𝐹!  ! !!! !"!! 𝑎 ∈ 𝐴 𝑓 ∈ 𝐹 (16) Disaggregate intermediate input demand 𝑄𝐼𝑁𝑇!  ! = 𝑖𝑐𝑎!  ! ∗ 𝑄𝐼𝑁𝑇𝐴!   𝑎 ∈ 𝐴 𝑐 ∈ 𝐶 (17) Commodity production and allocation 𝑄𝑋𝐴𝐶!  ! + 𝑄𝐻𝐴!  !  ! !∈! = 𝜃!  ! ∗ 𝑄𝐴! 𝑎 ∈ 𝐴 𝑎 ∈ 𝐶𝑋 (18) Output aggregation function 𝑄𝑋! =∝! !" ∗ 𝛿!  ! !" ∗ 𝑄𝑋𝐴𝐶!  ! !!! !" !∈! ! ! !! !"!! 𝑐 ∈ 𝐶𝑋 (19) First-order condition for output aggregation function 𝑃𝑋𝐴𝐶!  ! = 𝑃𝑋! ∗ 𝑄𝑋! 𝛿!  ! !" ∗ 𝑄𝑋𝐴𝐶!  ! !!! !" !∈!! !! ∗ 𝛿!  ! !" ∗ 𝑄𝑋𝐴𝐶!  ! !!! !"!! 𝑎 ∈ 𝐴 𝑐 ∈ 𝐶𝑋 (20) Output Transformation (CET) function 𝑄𝑋! =∝! ! ∗ 𝛿! ! ∗ 𝑄𝐸! !! ! + 1 − 𝛿! ! ∗ 𝑄𝐷! !! ! ! !! ! 𝑐 ∈ 𝐶𝐸 ∩ 𝐶𝐷 (21) Export-domestic supply ratio 𝑄𝐸! 𝑄𝐷! = 𝑃𝐸! 𝑃𝐷𝑆! ∗ 1 − 𝛿! ! 𝛿! ! ! !! !!! 𝑐 ∈ 𝐶𝐸 ∩ 𝐶𝐷 (22)
  56. 56. 37 Output transformation for non-exported commodities 𝑄𝑋! = 𝑄𝐷! + 𝑄𝐸! 𝑐 ∈ 𝐶𝐷 ∩ 𝐶𝐸𝑁 ∪ 𝐶𝐸 ∪ 𝐶𝐷𝑁 (23) Composite supply (Armington) function 𝑄𝑄! =∝! ! ∗ 𝛿! ! ∗ 𝑄𝑀! !!! ! + 1 − 𝛿! ! ∗ 𝑄𝐷! !!! ! ! ! !! ! 𝑐 ∈ 𝐶𝑀 ∩ 𝐶𝐷 (24) Import-domestic demand ratio 𝑄𝑀! 𝑄𝐷! = 𝑃𝐷𝐷! 𝑃𝑀! ∗ 𝛿! ! 1 − 𝛿! ! ! !!!! ! 𝑐 ∈ 𝐶𝑀 ∩ 𝐶𝐷 (25) Composite supply for non-imported outputs and nonproduced imports 𝑄𝑄! = 𝑄𝐷! + 𝑄𝑀! 𝑐 ∈ 𝐶𝐷 ∩ 𝐶𝑀𝑁 ∪ 𝐶𝑀 ∪ 𝐶𝐷𝑁 (26) Demand for transactions services 𝑄𝑇! = 𝑖𝑐𝑚!  !! ∗ 𝑄𝑀!! + 𝑖𝑐𝑒!  !! ∗ 𝑄𝐸!! + 𝑖𝑐𝑑!  !! ∗ 𝑄𝐷!! !!∈!! 𝑐 ∈ 𝐶𝑇 (27) Institution Block Factor income 𝑌𝐹! = 𝑊𝐹! !∈! ∗ 𝑊𝐹𝐷𝐼𝑆𝑇!  ! ∗ 𝑄𝐹!  ! 𝑓 ∈ 𝐹 (28) Institutional factor incomes 𝑌𝐼𝐹!  ! = 𝑠ℎ𝑖𝑓!  ! ∗ 1 − 𝑡𝑓! ∗ 𝑌𝐹! − 𝑡𝑟𝑛𝑠𝑓𝑟!"#  ! ∗ 𝐸𝑋𝑅 𝑖 ∈ 𝐼𝑁𝑆𝐷 𝑓 ∈ 𝐹 (29) Income of domestic, nongovernment institutions 𝑌𝐼! = 𝑌𝐼𝐹!  ! !∈! + 𝑇𝑅𝐼𝐼!  !! !!∈!"#$"!! + 𝑡𝑟𝑛𝑠𝑓𝑟!  !"# ∗ 𝐶𝑃𝐼 + 𝑡𝑟𝑛𝑠𝑓𝑟!  !"# ∗ 𝐸𝑋𝑅 𝑖 ∈ 𝐼𝑁𝑆𝐷𝑁𝐺 (30) Intra-institutional transfers 𝑇𝑅𝐼𝐼!  !! = 𝑠ℎ𝑖𝑖!  !! ∗ 1 − 𝑀𝑃𝑆!! ∗ 1 − 𝑇𝐼𝑁𝑆!! ∗ 𝑌𝐼!! 𝑖 ∈ 𝐼𝑁𝑆𝐷𝑁𝐺 𝑖! ∈ 𝐼𝑁𝑆𝐷𝑁𝐺! (31) Household consumption expenditure 𝐸𝐻! = 1 − 𝑠ℎ𝑖𝑖!  ! !∈!"#$"% ∗ 1 − 𝑀𝑃𝑆! ∗ 1 − 𝑇𝐼𝑁𝑆! ∗ 𝑌𝐼! ℎ ∈ 𝐻 (32)
  57. 57. 38 Household comsumption demand for marketed commodities 𝑃𝑄! ∗ 𝑄𝐻!  ! = 𝑃𝑄! ∗ 𝛾!  ! ! + 𝛽!  ! ! ∗ 𝐸𝐻! − 𝑃𝑄!! !!∈! ∗ 𝛾!!! ! − 𝑃𝑋𝐴𝐶!  !! !!∈! ∗ 𝛾!  !!! ! !"# 𝑐 ∈ 𝐶 ℎ ∈ 𝐻 (33) Household consumption demand for home commodities 𝑃𝑋𝐴𝐶!  ! ∗ 𝑄𝐻𝐴!  !  ! = 𝑃𝑋𝐴𝐶!  ! ∗ 𝛾!  !  ! ! + 𝛽!  !  ! ! ∗ 𝐸𝐻! − 𝑃𝑄!! !!!" ∗ 𝛾!!! ! − 𝑃𝑋𝐴𝐶!  !! !!!" ∗ 𝛾!  !!! ! !"# 𝑎 ∈ 𝐴 𝑐 ∈ 𝐶 ℎ ∈ 𝐻 (34) Investment demand 𝑄𝐼𝑁𝑉! = 𝐼𝐴𝐷𝐽 ∗ 𝑞𝚤𝑛𝑣! 𝑐 ∈ 𝐶𝐼𝑁𝑉 (35) Government consumption demand 𝑄𝐺! = 𝐺𝐴𝐷𝐽 ∗ 𝑞𝑔! 𝑐 ∈ 𝐶 (36) Government revenue 𝑌𝐺 = 𝑇𝐼𝑁𝑆! !∈!"#$"% ∗ 𝑌𝐼! + 𝑡𝑓! !∈! ∗ 𝑌𝐹! + 𝑡𝑣𝑎! !∈! ∗ 𝑃𝑉𝐴! ∗ 𝑄𝑉𝐴! + 𝑡𝑎! !∈! ∗ 𝑃𝐴! ∗ 𝑄𝐴! + 𝑡𝑚! !∈!" ∗ 𝑝𝑤𝑚! ∗ 𝑄𝑀! ∗ 𝐸𝑋𝑅 + 𝑡𝑒! !∈!" ∗ 𝑝𝑤𝑒! ∗ 𝑄𝐸! ∗ 𝐸𝑋𝑅 + 𝑡𝑞! !∈! ∗ 𝑃𝑄! ∗ 𝑄𝑄! + 𝑌𝐼𝐹!"#  ! !∈! + 𝑡𝑟𝑛𝑠𝑓𝑟!"#  !"# ∗ 𝐸𝑋𝑅 (37) Government expenditure 𝐸𝐺 = 𝑃𝑄! !∈! ∗ 𝑄𝐺! + 𝑡𝑟𝑛𝑠𝑓𝑟!  !"# !∈!"#$"% ∗ 𝐶𝑃𝐼 (38) System Constraint Block Factor market 𝑄𝐹!  ! !∈! = 𝑄𝐹𝑆! 𝑓 ∈ 𝐹 (39) Composite commodity markets 𝑄𝑄! = 𝑄𝐼𝑁𝑇!  ! !∈! + 𝑄𝐻!  ! !∈! + 𝑄𝐺! + 𝑄𝐼𝑁𝑉! + 𝑞𝑑𝑠𝑡! + 𝑄𝑇! 𝑐 ∈ 𝐶 (40) Current account balance for rest of the world (in foreign currency) 𝑝𝑤𝑚! !∈!" ∗ 𝑄𝑀! + 𝑡𝑟𝑛𝑠𝑓𝑟!"#  ! !∈! = 𝑝𝑤𝑒! !∈!" ∗ 𝑄𝐸! + 𝑡𝑟𝑛𝑠𝑓𝑟!  !"# !∈!"#$ + 𝐹𝑆𝐴𝑉 (41) Government balance 𝑌𝐺 = 𝐸𝐺 + 𝐺𝑆𝐴𝑉 (42)
  58. 58. 39 Direct institutional tax rates 𝑇𝐼𝑁𝑆! = 𝑡𝚤𝑛𝑠! ∗ 1 + 𝑇𝐼𝑁𝑆𝐴𝐷𝐽 ∗ 𝑡𝑖𝑛𝑠01! + 𝐷𝑇𝐼𝑁𝑆 ∗ 𝑡𝑖𝑛𝑠01! 𝑖 ∈ 𝐼𝑁𝑆𝐷𝑁𝐺 (43) Institutional savings rates 𝑀𝑃𝑆! = 𝑚𝑝𝑠! ∗ 1 + 𝑀𝑃𝑆𝐴𝐷𝐽 ∗ 𝑚𝑝𝑠01! + 𝐷𝑀𝑃𝑆 ∗ 𝑚𝑝𝑠01! 𝑖 ∈ 𝐼𝑁𝑆𝐷𝑁𝐺 (44) Saving-Investment Balance 𝑀𝑃𝑆! !∈!"#$"% ∗ 1 − 𝑇𝐼𝑁𝑆! ∗ 𝑌𝐼! + 𝐺𝑆𝐴𝑉 + 𝐸𝑋𝑅 ∗ 𝐹𝑆𝐴𝑉 = 𝑃𝑄! !∈! ∗ 𝑄𝐼𝑁𝑉! + 𝑃𝑄! !∈! ∗ 𝑞𝑑𝑠𝑡! (45) Total absorption 𝑇𝐴𝐵𝑆 = 𝑃𝑄! !∈! ∗ 𝑄𝐻!  ! !∈! + 𝑃𝑋𝐴𝐶!  ! !∈! ∗ 𝑄𝐻𝐴!  !  ! + 𝑃𝑄! !∈! ∗ 𝑄𝐺! !∈!!∈! + 𝑃𝑄! !∈! ∗ 𝑄𝐼𝑁𝑉! + 𝑃𝑄! !∈! ∗ 𝑞𝑑𝑠𝑡! (46) Ratio of investment to absorption 𝐼𝑁𝑉𝑆𝐻𝑅 ∗ 𝑇𝐴𝐵𝑆 = 𝑃𝑄! !∈! ∗ 𝑄𝐼𝑁𝑉! + 𝑃𝑄! !∈! ∗ 𝑞𝑑𝑠𝑡! (47) Ration of government consumption to absorption 𝐺𝑂𝑉𝑆𝐻𝑅 ∗ 𝑇𝐴𝐵𝑆 = 𝑃𝑄! !∈! ∗ 𝑄𝐺! (48)
  59. 59. 40 ANNEX  IV.CGE  Model  Data  for  Vietnam   National  accounts  (GSO)   2011     Gross  capital  formation   866,744     Grossfixed  capital  formation   785,206      Changes  in  stocks    81,538       Final  consumption   1,957,848      State   164,323      Private     1,793,525     Trade  balance  (goods  &  services)   -­‐44,712      Exports     2,206,971      Imports   2,251,683     Statistical  discrepancy   0   State  expenditures         2011   A    Total  expenditures   739,926   I  Current  expenditure   546,081   1  Administration  expenditure   68,202   2  Economic  expenditure   55,212   3  Social  expenditure   264,331   4  Defence   0   5  Security   0   6  Interest  payment   36,560   7  Expenditure  on  reform  of  salary  policy   14,265   8  Others   107,511   II  Expenditure  on  investment  development   193,845   1  Capital  construction  expenditure   185,000   2  Others   8,845   III  Contingency   0   B  rought  forward  expenditure   22,400   State  revenues         2011   A   Total  revenues  and  grants  (I+IV+V)   704,267   I   Current  revenues  (II+III)   644,003   II   Taxes   600,500   1   Corporate  income  tax   184,481   2   Individual  income  tax   38,463   3   Land  and  housing  tax   1,604   4   Licence  tax   1,476   5   Tax  on  the  transfer  of  properties   15,701   6   Tax  on  land  use  right  transfer   0   7   Value  added  tax   195,451   8   Special  cons.  tax  for  domestic   42,525   9   Natural  resouces  tax   39,287  
  60. 60. 41 10   Agricultural  tax   72   11   Imp  -­‐  Exp.  tax,  special  cons.  tax  on  imports   81,440   12   Other  taxes   0   III   Fees,  charges  and  non-­‐tax   43,503   13   From  discrepancy  of  import  prices   0   14   Fees  and  charges  (include  gasoline  fee)   19,465   15   Rental  of  land   5,570   16   Others   18,468   IV   Capital  revenues  (revenues  from  sale  of  State  -­‐   owned  houses,  land  use  right  assignment)   53,058   V   Grants   7,206   B   Brought  forward  revenue   10,000   Balance  of  payments  data  (IMF)    Millions  of  USD         2011     Current  Account,  n.i.e  78ald     233     Goods:  Exports  f.o.b  78aad     96,906     Goods:  Imports  f.o.b  78abd     -­‐97,356     Trade  Balance  78acd   -­‐450     Services:  Credit  78add   8,692     Services:  Debit.  78aed   -­‐11,860     Balance  on  Goods  &  Services.  78afd     -­‐3,618     Income:  Credit.  78agd   395     Income:  Debit  78ahd   -­‐5,229     Balance  on  Gds,  Serv.  &  Inc.  78aid   -­‐8,452     Current  Transfers,  n.i.e.:  Credit  78ajd   8,685     Current  Transfers:  Debit.  78akd     0     Aid  inflows  -­‐  OECD  DAC   3,285     Private  (FDI,  Loans,  Port)  -­‐  GSO   8,029     Exchange  rate   20,506  
  61. 61. ANNEX  V.  Macroeconomic  SAM  for  the  Model   Activities Comodities Land Labour Capital Ent. HouseH. Gov. Act. tax Factor tax Sale tax Import tax Ent. tax Income tax Stocks Saving- inv RoW Total Activities 2,710,166   2,710,166 Comodities 1,742,054   205,527   759,386   139,746                   12,886   466,851   766,862   4,093,311 Land 62,867   62,867 Labour 499,343   0   499,343 Capital 390,008   0   390,008 Enterprises 332,142   31,182   17,488   380,812 Households 60,423   499,343   155,830   36,597   58,624   810,817 Governments 45,796   0       15,894   8,134   120,731   32,006   0   111,153   4,256   337,969 Activity tax 15,894       15,894 Factor tax         2,444       5,690   8,134 Sale tax     120,731   120,731 Import tax     32,006   32,006 Enterprise tax         0 Income tax             103,024   8,129   111,153 Change in stocks 12,886   12,886 Saving-investment 76,162   43,302   130,444   229,828   479,737 Rest of the world 1,024,882   0   52,176   0   0   0   1,077,058 Total 2,710,166 4,093,311 62,867 499,343 390,008 380,812 810,817 337,969 15,894 8,134 120,731 32,006 0 111,153 12,886 479,737 1,077,058
  62. 62. 43 ANNEX  VI.  Impacts  of  excise  tax  on  GDP   (Results produced by GAMS)     ABSORP   PRVCON   FIXINV   DSTOCK   GOVCON   EXPORTS   IMPORTS   GDPMP   GDPMP2   NETITAX   GDPFC2   NOMINAL   BASE   3.0152   1.8135   0.7852   0.2521   0.1643   2.0164   -­‐2.2517   2.7799   2.7799   0.4059   2.3740   NOMINAL   TARCUT2   -­‐0.01038   -­‐0.0060   -­‐0.0184   -­‐0.0110   -­‐0.0192   -­‐0.0160   -­‐0.0161   -­‐0.0098   -­‐0.0098   0.0555   -­‐0.0210   REAL   BASE   3.0152   1.8135   0.7852   0.2521   0.1643   2.0164   -­‐2.2517   2.7799     0.4059   2.3740   REAL   TARCUT2   -­‐0.0014   -­‐0.0023         0.0007   0.0007   -­‐0.0015     -­‐0.0103   0.0000   NOMSHARE   BASE   108.4649   65.2375  28.2460   9.0702   5.9112   72.5344   -­‐80.9993  100.0000  100.0000   14.6016   85.3984   NOMSHARE   TARCUT2   -­‐0.0005   0.0038   -­‐0.0086   -­‐0.0012   -­‐0.0094   -­‐0.0062   -­‐0.0063   0.0000   0.0000   0.0653   -­‐0.0112   REALSHARE   BASE   108.4649   65.2375  28.2460   9.0702   5.9112   72.5344   -­‐80.9993  100.0000     14.6016   85.3984   REALSHARE   TARCUT2   0.0001   -­‐0.0008   0.0015   0.0015   0.0015   0.0022   0.0022   0.0000     -­‐0.0088   0.0015   DEFLATOR   BASE   100   100   100   100   100   100   100   100     100   100   DEFLATOR   TARCUT2   -­‐0.0090   -­‐0.0037   -­‐0.0184   -­‐0.0110   -­‐0.0192   -­‐0.0168   -­‐0.0168   -­‐0.0083     0.0657   -­‐0.0210  
  63. 63. ANNEX  VII.  Impacts  of  excise  tax  on  industries   (Results produced by GAMS)        No     Industry     BASE  LINE     EXCISE  TAX  IMPOSITION     1   apadd   0.311162691   0.005199295   2   asugr   0.017418107   0.006538302   3   aacrp   0.08162257   0.000766059   4   arubb   0.015513009   0.00040955   5   acoff   0.037969392   -­‐0.020913731   6   altea   0.006341878   -­‐0.000181997   7   apcrp   0.099828921   -­‐0.03291866   8   abovp   0.11829032   0.012950113   9   apoul   0.045533969   0.003882107   10  aoliv   0.042464545   0.008973534   11  afore   0.020735493   0.019037157   12  afish   0.077487079   0.037990322   13  aaqua   0.128479907   0.040567029   14  acoal   0.072191791   0.00075195   15  acoil   0.171803192   0.000280395   16  angas   0.040453121   0.000214265   17  aomin   0.033824548   0.001016106   18  ameat   0.049031555   0.01465618   19  apfsh   0.184951276   0.062601677   20  apveg   0.034875612   0.007199529   21  apoil   0.027842594   0.010320689   22  adair   0.044058606   0.00660759   23  arice   0.101749477   0.032320435   24  aflou   0.022645835   -­‐0.000480728   25  afood   0.251547613   0.008213568   26  abevn   0.060906926   -­‐0.587402961   27  abeva   0.017743638   -­‐0.050489618   28  atoba   0.05015579   0.015141942   29  afibr   0.084124868   0.010619178   30  atext   0.071898824   0.010913222   31  aclth   0.153063097   0.009420197   32  aleat   0.059297891   0.017764667   33  afoot   0.091659552   0.021998895  
  64. 64. 45        No     Industry     BASE  LINE     EXCISE  TAX  IMPOSITION     34  awood   0.052114925   0.048777518   35  apapr   0.066088551   0.001409013   36  aprnt   0.027452772   0.004155161   37  afuel   0.109180048   0.00378498   38  achem   0.362966448   0.003816183   39  anmet   0.059808327   -­‐0.008625703   40  aceme   0.115490956   0.000546276   41  ametl   0.150584185   -­‐0.001207381   42  ametp   0.211731654   0.000192809   43  amach   0.354077418   0.005114195   44  aemch   0.032840228   0.004215742   45  avehe   0.301682712   0.006798895   46  afurn   0.126231277   0.017311203   47  aoman   0.056614516   -­‐0.049627209   48  aelec   0.140595625   0.001801059   49  awatr   0.015171936   -­‐0.001655134   50  acons   0.622189339   0.000100181   51  atrad   0.437988369   0.001660363   52  ahotl   0.041344798   0.004866821   53  atrnr   0.141765219   -­‐0.004796367   54  atrna   0.01874452   0.006378126   55  atrno   0.098764317   0.006393415   56  acomm   0.197358996   -­‐0.018923658   57  abusi   0.073316641   -­‐0.018162495   58  afsrv   0.168431713   0.006787928   59  areal   0.118777976   0.00854345   60  aadmn   0.141438236   0.002746955   61  aeduc   0.105085044   0.010045129   62  aheal   0.053206239   0.010473473   63  aosrv   0.060578175   0.008017495  

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